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Sunday, July 19, 2009

The Psychology Of Human Misjudgement: Availability-Misweighing

Charlie Munger is Warren Buffett's right hand man at Berkshire Hathaway. Over the next few weekends, we'll be summarizing the text he authored titled "The Psychology Of Human Misjudgement", where he describes some of man's tendencies. By understanding and learning from these tendencies, we better equip ourselves to avoid psychological biases when investing.

When information is readily available, humans tend to put more emphasis on the value of that information. It is not only unavailable information that is underweighed as a result, but information that the brain can't remember or is blocked from using as a result of being influenced by another tendency.

Munger describes the main anitode to this tendency is the use of standard procedures (or checklists). Another antidote involves emphasizing factors for which numerical data is not available. Finally, one can hire intelligent, skeptical and articulate minds to argue against incumbent opinions.

While vivid and memorable evidence should be consciously underweighed (since it is subconsciously overweighed), such evidence can still be very useful. For one, it can be used constructively to persuade others of a correct conclusion. For another, it can be used to improve one's memory by attaching vivid images to items one does not want to forget, a technique of Greek and Roman classical orators who gave long, organized speeches without notes.

The lesson of this tendency is to understand that an idea or fact is not worth more simply because it is available.